A fascinating article in Fast Company profiles Google Ventures, the company’s venture capital division. Like everything the search giant does they are aiming big with delusions of changing the entire VC industry with data as the vehicle.
They start out with some interesting facts:
Despite the mythology that has built up around venture capital, it has become a slowly moldering investment vehicle. “The past 10 years haven’t been very productive,” Bill Maris points out. According to the research firm Cambridge Associates, during the decade ending last September, VCs as a class earned a 2.6% interest rate for their investors–less than you could have earned in an S&P 500 index fund. The numbers look slightly better over shorter periods; VCs have delivered a 4.9% return the past three years and 6.7% over the past five, still far from terrific.
Joe Kraus says that analysts have discovered research that overturns some of Silicon Valley’s most cherished bits of lore. Take that old idea that it pays to fail in the Valley: Wrong! Google Ventures’ analysts found that first-time entrepreneurs with VC backing have a 15% chance of creating a successful company, while second-timers who had an auspicious debut see a 29% chance of repeating their achievement. By contrast, second-time entrepreneurs who failed the first time? They have only a 16% chance of success, in effect returning them to square one. “Failure doesn’t teach you much,” Kraus says with a shrug.
Location, in fact, plays a larger role in determining an entrepreneur’s odds than failure, according to the Google Ventures data team. A guy who founded a successful company in Boston but is planning to start his next firm in San Francisco isn’t a sure bet. “He’ll revert back to that 15% rate,” Kraus says, “because he’s out of his personal network and that limits how quickly he can scale up.”
The article continues to describe the actions Google is taking to change the game. The most important of which seems to be bringing in ringers rather than partners, challenging the VC model at its core…
read the full article – Google’s Creative Destruction